Foreign Currency Transactions and Tax Consequences

Summary

This practice note discusses foreign currency transactions covered by I.R.C. Section 988 and the tax consequences thereunder. I.R.C. Section 988 provides rules for the determination of the character and source of gains or losses from certain foreign currency transactions. I.R.C. Section 988 transactions are certain transactions where the amount that the taxpayer is entitled to receive or is required to pay by reason of such transaction is denominated in terms of a nonfunctional currency or by reference to the value of one or more nonfunctional currencies. A nonfunctional currency, for a taxpayer or a qualified business unit (QBU), is a currency other than the taxpayer's functional currency or the QBU's functional currency.